doris schonemann

Swiss Federal Social Security FundsAVS/AI/APG

TBLI Conference Asia 2011Challenges for the social security system

The experience of the Swiss Federal Social Security Funds AVS/AI/APG.

Dr. Doris M. SchönemannVice-Chairperson of the Board of Directors of the Swiss Federal Social Security Fund AVS/AI/APG.

Swiss Federal Social Security Funds AVS/AI/APG

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TBLI ConferenceAsia 2011

Doris Schönemann

Table of Contents

1 Introduction to the Swiss Federal Social Security Funds

2 Forces of change and adapting

3 Corporate Governance

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The Overall Picture of Swiss Social Security

Three Pillar Concept

1. Pillar 2. Pillar 3. Pillar

AVS/AI/APG Social

Security

Mandatory for everybody

Securing the meansof existence

Pension Fund

Mandatory for employers and

employees

Private Pension

optional

Securing living standard

Individualbenefits

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Established by Law in 1948 in the context of post-war period, where no material safety net existed.

Values • Providing minimum pensions for old age, widows and orphans• Intergenerational solidarity (pay as you go)


Swiss Federal Social Security Funds

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Social contract between: • generations• social classes • man and woman (inter-gender)

Contribution ExpensesFunds


The 1. Pillar: "Pay as you go"-System

Asset under Management27 bn CHF

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Old Age InsuranceSince 1948

Disability InsuranceSince 1960

Income CompensationSince 1953

Role:Payment of benefits to the elderly people i.e. CHF 3'480 for couple or 2'320 for single per month

Beneficiaries (2010):2’205’218

Assets (2011):20.3 bn CHF

Role:Payment of benefits to disabled people

Beneficiaries (2010):375’484


Role :Temporary compensation for the loss of income due to military duty or maternity leave.

Beneficiaries (2010):279’178 Military67’329 Maternity



Three Funds AVS/AI/APG

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1. To ensure that the AVS, AI and APG benefits canbe paid at all times. In case of insufficient fundingof payments between two pension dates, the bufferfund has to bridge this gap in order to fulfill legal obligations (payments in time) of the AVS/AI/APG.


Objectives

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2. To invest assets safely while providing reasonable risk-adjusted returns.The Swiss Federal Social Security Funds are the central asset managers of the assets of the Federal Old Age and Survivors' Insurance (AVS), the Federal Disability Insurance (AI) and the Income Compensation Scheme (APG).

Plus:• Financial accounting for AVS/AI/APG• Annual report to the Swiss Federal Council


Objectives - continued

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APG

AI

AVS

Inflows46’409 bn CHF

APG

AI

AVS

Outflows47’265 bn CHF


Presentation of Inflows and Outflows

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Employers and Independents

Swiss Federal Social Security Funds

Confederation

Value added Tax

Casino Tax

Return of Investments

~ 100 Compensation

Offices


AVS/AI/APG Inflows

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The driving Forces are:• Demographics• Economic Growth• Financial Markets

2 Forces of Change and Adapting

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Source: BFS ( in ‘000 )


Age Pyramid Switzerland 2005

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1 Pensioner for 6.5 Contributors

1948

1 Pensioner for2 Contributors

2038

1 Pensioner for 3.6 Contributors

2008


Ratio Pensioner / Contributors

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The Swiss Social Security System is one of the pillars of stability in Switzerland, therefore it would be alarming, if the Swiss population would loose faith in this institution.

Basic Values are still shared:• Intergenerational solidarity• Broad consensus that old age should be secured by minimum means of existence

Up to now 10 revisions to the law governing the Swiss Social Security, with focus on amendments.

But: Today the world is changing rapidly


Adapting to Demographic ChangesBasic Values

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Responsibility lays with Politics:If income is the sole base for a pay as you go system there would be no other way out, than to increase contributions:

• Raise the pension age• Increase the percentage of contributions for the funding

or alternative funding, such as increase in Value Added Tax (VAT), the taxing of interest rate income, taxing capital gains

• More women in the working force


Adapting to Demographic Changes

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Role of the Board of the Social Security Funds:Influence the political discussion on demographic issues by drastically improving transparency:

• Be extremely transparent and clear in figures and messages• Define critical trigger points: Funds assets are reaching

a critical point, politics has to react The Board defined the Investment Horizon with 5 years. These 5 years should give politics time to react.


Adapting to Demographic Changes

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Economic Factors: GDP Growth 1960 - 2010

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The main difference between a buffer fund, financed through current contributions and a pension fund is that a buffer fund has to cope with pro cyclicality.

If the economy is on a downward trend, then the contributions go down also.


Correlation between Economic Growth and Funds Income

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Swiss GDP Growth and Development of Fund Assets

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Investment Results Social Security Funds1948 - 2010

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If the Portfolio Managers invest in risky asset classes, this can produce even more stress in times of declining growth rates for the economy.

The Lesson for the Board of Directors is:

Steer the Strategic Asset Allocation by risk not by return.


Adapting to Pro Cyclicality

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• Performance analysis per asset class

• Positioning in economic cycle• Tactical elements

• Planning of investment and liquidity (treasury function)

• Analysis of money market(short-term)

• Selection of investment products

Market Portfolio

Basic Portfolio


Creation of 2 synthetic Portfolios

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Nominally weighted Risk weighted(incl. Tactical assets)


Market Portfolio - Focus on Risk

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Mission of the funds: cover temporary deficits

Board decision:• Time horizon = 5 years• Funding Ration (Assets divided by maximum stress tested

outflows over 5 years)


Risk Tolerance:Time Horizon and Funding Ratio

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Depending on the pre-defined volatility target Funding Ratio of the combined portfolio, the ratio between market and basis portfolio is being determined• Market Portfolio• Basis Portfolio

Basic Portfolio

Market Portfolio


Portfolio Construction

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Strategic Updated 30. 06. 2011


Asset Allocation Swiss SocialSecurity Funds 2011

27 bn CHF

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Sustainable Equities

SustainableEquities

60%

OtherEquities

40%

Equities4.6 bn CHF

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Economy will be more volatile - Financial system will be more fragile and unstable.

Quality and Time are critical factors:• speed of updating information• ability to digest information (for digesting it is important

that information is coherent and transparent)


Higher Volatility: Information Systems

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The rebalancing process between the market and the basis portfolio is quite complex How to cope?

Install robust processes• how to rebalance • which kind of financial instruments are allowed• when to rebalance, Trigger Points can be helpful• how to monitor the results• who is responsible for reporting and controlling to the Board of Directors create the position of a Risk Manager


Higher Complexity:Install robust Processes

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Play by the Rules Set of Rules and Regulations

Transparent: Regulations are on the Internet

For Example: Voting Rules in General Assemblies


Define Responsibilities to the differentStakeholders

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At the proposal of the Federal AHV/IV Commission, the Federal Council appoints the 11 members of the Board of directors and elects the chairman and the vice-chairman. The insured, employers, employees, and Confederation must all be adequately represented on the Board of directors.


Role of Board of Directors of the Funds

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Board Committee: 6 members

Insured:

4

Employers:

3

Employees:

3

Confederation:

1

GovernmentRepresentatives:

3

Check and Balances in organizational Set up


Role of Board of Directors of the Funds

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In short:It boils down to people with commitment and visionand focus on implementation.

"Doing good" has to be done well. That’s the real challenge.


Good Governance

doris schonemann

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